On the RMB

Last night I complained about Chris Coons's habit, in his televised Delaware "debate" with Christine O'Donnell, of beginning most of his responses with, "there's too much here to respond to." But that is sort of how I feel at the moment about the RMB. Let me make three points and then offer a bonanza of links and excerpts for your spare-time reading.

Tomorrow the Treasury Department will release its findings about whether China's (uncontested, obvious, and indisputable) central-bank efforts to hold down the value of the RMB amount to "currency manipulation." Those findings were originally due six months ago, but the declaration was deferred until now (and can in theory be re-deferred indefinitely). [Update: My mistake. The reports are due each April 15 and October 15. Last April's was deferred to July. The judgment on "manipulation" can be indefinitely deferred.] Here's my guide to the news:

1) What the US wants. Or what it should want, if it fully had its wits about it. What it wants is continued movement in the RMB's value against the dollar. Not a sudden one-time jump in value. (For another time: why "sudden" change is almost never what you want from the Chinese government, in any area.) Not a specified new target exchange rate. Just a demonstration by the Chinese authorities that they understand that the currency's value has to go up, and they're not going to prevent that process -- as they foolishly tried to for a while this summer.

Background: the dollar/RMB rate was essentially frozen, at just over 8 RMB/$1, for many years until late 2005. Then for about the next two and a half years, the Chinese government allowed a "managed float," and the RMB rose against the dollar until it reached a level of about 6.8/$1 in mid-2008. Once the world financial crisis hit and demand for Chinese exports plummeted, to protect its struggling export industries the Chinese government froze the RMB's value once more.

This chart (from Yahoo Finance) gives the idea. The chart shows the value of the dollar -- so a declining line means a stronger RMB. The truncated vertical scale exaggerates the degree of change, but it accurately shows the trend:
After the Obama Administration avoided declaring China a "currency manipulator" this spring, the Chinese government let the RMB start appreciating again. This was assumed to be a pre-greased understanding: as long as the Chinese government wasn't forced to "knuckle under" to foreign pressure, it could start moving in the right direction. Then, after a very short time, the appreciation stopped -- this chart shows the movement over the past year:


What we're seeing here: the essentially frozen exchange rate until June of this year, then the brief strengthening of the RMB's value through June and until early July  -- and then the reverse trend, through much of the summer, of the RMB weakening again against the dollar. Finally, starting about a month ago, the Chinese government let the RMB's value start rising once more.

The US wants the recent trend to continue. We can argue about faster, slower, or the right "eventual" value for the RMB. But as long as its value is rising, the Chinese government is playing ball; and if it ever stops rising, the Chinese government is being deliberately uncooperative. That's what it did for two difficult months this summer -- the stretch on the graph above from early July to early September.

2) What tools and weapons the U.S. has. It might seem that the "big" weapon here is the "currency manipulator" label, but there is little reason to think that would do any good (beyond sounding tough). For one thing, it is guaranteed to strengthen the hand of the "Hell no, we won't bow to the foreigners!" camp within the Chinese government. Worse, it creates the "shot the wad" problem. Having exercised this threat, the U.S. doesn't have a convenient next step to take -- or threat to hold in reserve. Moreover, applying this label to China would open up endless subsequent arguments about when and whether China could ever come off the "manipulator" list.

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James Fallows is a national correspondent for The Atlantic and has written for the magazine since the late 1970s. He has reported extensively from outside the United States and once worked as President Carter's chief speechwriter. His latest book is China Airborne. More

James Fallows is based in Washington as a national correspondent for The Atlantic. He has worked for the magazine for nearly 30 years and in that time has also lived in Seattle, Berkeley, Austin, Tokyo, Kuala Lumpur, Shanghai, and Beijing. He was raised in Redlands, California, received his undergraduate degree in American history and literature from Harvard, and received a graduate degree in economics from Oxford as a Rhodes scholar. In addition to working for The Atlantic, he has spent two years as chief White House speechwriter for Jimmy Carter, two years as the editor of US News & World Report, and six months as a program designer at Microsoft. He is an instrument-rated private pilot. He is also now the chair in U.S. media at the U.S. Studies Centre at the University of Sydney, in Australia.

Fallows has been a finalist for the National Magazine Award five times and has won once; he has also won the American Book Award for nonfiction and a N.Y. Emmy award for the documentary series Doing Business in China. He was the founding chairman of the New America Foundation. His recent books Blind Into Baghdad (2006) and Postcards From Tomorrow Square (2009) are based on his writings for The Atlantic. His latest book is China Airborne. He is married to Deborah Fallows, author of the recent book Dreaming in Chinese. They have two married sons.

Fallows welcomes and frequently quotes from reader mail sent via the "Email" button below. Unless you specify otherwise, we consider any incoming mail available for possible quotation -- but not with the sender's real name unless you explicitly state that it may be used. If you are wondering why Fallows does not use a "Comments" field below his posts, please see previous explanations here and here.

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